Among artificial intelligence (AI) companies, perhaps none are more important than the "Magnificent Seven." Except for Tesla, each Magnificent Seven stock has a market cap over $1 trillion.
However, I'd argue that Nvidia (NVDA 6.18%) is the most influential among megacap tech companies at the moment. Nvidia specializes in manufacturing semiconductor chips called graphics processing units (GPU).
Over the last year, demand for GPUs skyrocketed, given their role across a variety of generative AI applications including machine learning and accelerated computing. As such, shares of Nvidia have gone parabolic -- rocketing up to 284% in the last year.
In terms of dollars, consider that as of market close on March 7, Nvidia has added $1 trillion of market cap to its value since mid-January. The best part? I think the ride is just getting started.
Let's dig into how Nvidia gained access to the exclusive $2 trillion club, and why further gains could be on the horizon.
Nvidia's path to $1 trillion is impressive, but...
Nvidia generates revenue from several sources including graphics processors, compute networking, and data center operations. During the company's fiscal 2024, ended Jan. 28, Nvidia's largest revenue stream was from its data center business -- which grew 217% year over year.
This is undoubtedly impressive, but what investors may not totally understand is that Nvidia's data center business has been steadily rising for quite some time. In fact, revenue from the broader compute and networking division (which includes data centers) has increased more than 1,000% in just four years.
This is an important data point because in a way it undermines that Nvidia has been at the forefront of artificial intelligence (AI) for a while. Given the company's first-mover advantage as it pertains to AI-powered chips and quantum computing, Nvidia has amassed significant pricing power over its peers.
Unsurprisingly, Nvidia's accelerating revenue led to significant margin expansion and is dropping to the bottom line. For the year ended Jan. 28, Nvidia grew its free cash flow by more than sixfold over the prior year to $27 billion.
Now, with an arsenal of capital and interest in AI rising, Nvidia looks well positioned to keep dominating. Here's a preview of what the company has been exploring beyond its GPU and data center businesses.
Image source: Getty Images
More gains could be ahead
With so much cash at its disposal, Nvidia has quietly been deploying capital into other areas that could unlock further sustained growth.
Back in September, Nvidia participated in a $500 million funding round in artificial intelligence (AI) start-up Databricks. At first glance, this may look like a bit of a head-scratcher. But during the fourth quarter earnings call, Nvidia investors learned about the company's latest billion-dollar business -- enterprise software.
While Nvidia has been hard at work investing in its core chip business, the company also quietly built a software platform that it hopes will complement the semiconductor operation. Indeed, software services have myriad applications in the realm of AI. And while the partnership with Databricks is exciting, Nvidia isn't stopping there.
Another unique area that Nvidia is investing is voice-recognition software. The company holds a small stake in a company called SoundHound AI.
I found this particularly interesting because many of Nvidia's big tech cohorts have been investing in this technology for years. Since Apple's acquisition of voice-assistant Siri, the technology has become integrated throughout the company's hardware ecosystem. Furthermore, both Amazon and Alphabet use voice-powered AI for their respective lines of smart-home appliances.
Meanwhile, Microsoft acquired smart assistant Nuance a few years ago for a whopping $20 billion. Given that the market for voice-powered software services is expected to reach $50 billion by the end of the decade, I can see why Nvidia followed its counterparts.
The last area that Nvidia is showing interest is humanoid robotics. For years, Tesla has garnered most of the attention surrounding this technology due to its Optimus bot. But recently, Nvidia joined Intel Capital, OpenAI, and Jeff Bezos in a funding round for Figure AI. Robotics is a particularly subtle area in which Nvidia could disrupt both the hardware and software applications.
Where is Nvidia headed next?
As a long-term investor, I am encouraged by Nvidia's aggressive pursuits beyond GPUs and data center operations. While the software business is still relatively small and these investments are still in nascent phases of their potential, Nvidia's AI roadmap looks enticing.
At a price-to-earnings (P/E) ratio of 74, Nvidia stock isn't cheap. However, the company's revenue and profits are soaring -- and I don't see that stopping anytime soon.
It took over two decades for Nvidia to reach a $1 trillion dollar market cap. It took less than a year to get to $2 trillion.
While I can't say definitely where Nvidia is headed next, I'm confident further gains are in store in the long run. Given the company's investments into various new markets, Nvidia is quickly differentiating its business from the competition.
In the long run, I see Nvidia becoming a full-spectrum AI platform connected by a unique combination of both hardware and software. Despite its premium valuation, I think now is a terrific time to scoop up some shares.
